It is tempting, especially for newcomers, to think
A truly effective
Determining which entities must comply with bank regulations — and which, if any, are exempt — is a critical issue, particularly as the increasingly risky unregulated shadow banking system continues to expand and create an uneven playing field that increases risk for the entire financial system. A robust regulatory modernization effort must address this imbalance. At a minimum, bank regulation should prioritize high-quality safety and soundness standards and compliance with minimal burden. Ideally, the regulatory disparity between banks and the shadow banking system should be eliminated. While some entities, particularly in private credit, are resistant to banklike regulation (especially capital standards and supervisory credit guidance),
Bank "regulation" itself — that is, the written rules and regulations implementing statutes passed by Congress — is the tip of the problematic iceberg. Equally significant for banks and the economy is the government agency-directed supervisory system. This system, initially designed to ensure banks complied with written regulations, has evolved into an agency-directed overlay where supervisors exercise broad authority to interpret safety and soundness and compliance rules, directing banks' operations in ways they think best. Of late, this system has too often become an inconsistent, highly intrusive and, in many cases, undisciplined drag on the industry, adding less value than it could.
Now I am somebody who respects bank regulators. Throughout my career, as a banker, bank advisor, and regulator, I have worked closely with hundreds of dedicated examiners and supervisors who work extremely hard to ensure a safer financial system. They are typically highly knowledgeable about banking and genuinely care about the well-being of the banks they supervise and the safety and soundness of the economy. However, what once was a relatively simple and straightforward examination of a bank's financial condition and customer treatment has morphed into a system where, too often, bank examiners are so prescriptive that they are substituting their judgment for that of bank boards and management.
As if this picture were not worrisome enough, examiner comments — often useful and well-intended — have become "matters requiring attention," or MRAs, and "matters requiring immediate attention," or MRIAs, which, in practice, are akin to mini-enforcement actions that can escalate to even more onerous private and/or public enforcement actions if not addressed quickly enough. Turning what was once a more collaborative, consultative process into something that, too often, has the whiff of a star chamber proceeding adds complication and confrontation, degrading the supervisory process.
Consumer and employees groups are seeking a restraining order against CFPB acting Director Russell Vought, arguing that he was unlawfully installed and has "no power to direct" the bureau.
Compounding these challenges, the supervisory system itself has become inconsistent — both between bank regulators and even within the same regulatory agency. Many of us have, too often, witnessed significant differences in how different agencies view the same bank and its processes. Worse, we have lived through changes in "lead examiners" or national "horizontal" examination teams, bringing views that diverge sharply from those previously conveyed to the bank.
Furthermore, banks have no real rights of appeal when it comes to supervisory decisions. In fact, arguing with a supervisory position can lead to being labeled as uncooperative and result in implicit or explicit repercussions. This fear of supervisory repercussions can discourage banks from raising legitimate concerns, however politely.
While a detailed regulatory code covering every possible bank activity is neither feasible nor desirable, ensuring consistent interpretation of existing regulations is essential. Regulatory agencies can accomplish this by adopting practices similar to those of the judicial system, focusing on publicly available interpretations of decisions and prioritizing consistency in decision-making when interpreting statutes.
Establishing a mechanism — whether an "ombudsman" or something similar — that guarantees and encourages formal and informal appeals from banks and the public alike would improve both government effectiveness and economic vitality.
Modernizing bank oversight is not a "nice to have" but a "must have" for the well-being of our financial system. A failure to address these issues with care and vigor will result in a declining banking system and another financial crisis.
